Speaker 1: Pushkin from Pushkin Industries. This is Deep Background, the show
Speaker 1: where we explore the stories behind the stories in the news.
Speaker 1: I'm Noah Feldman. As the coronavirus pandemic continues, the economic
Speaker 1: situation is becoming more dire by the day. Not only
Speaker 1: have an enormous number of businesses closed, but more people
Speaker 1: have filed for unemployment here in the United States, faster
Speaker 1: than at any other time in our history. Meanwhile, no
Speaker 1: one can say for certain when this will end. What
Speaker 1: should the government be doing to help our massive bailout
Speaker 1: or stimulus packages that inject money into the economy actually effective.
Speaker 1: What other options are there facing us? To discuss these
Speaker 1: extremely pressing questions, We're joined by Laurence Summers of Harvard University.
Speaker 1: Larry was chief economist of the World Bank. He was
Speaker 1: first Deputy Secretary of the Treasury under President Linton, and
Speaker 1: then Secretary of the Treasury. He was president of Harvard University,
Speaker 1: and then as an adviser to Barack Obama. He helped
Speaker 1: pull our country through another financial crisis, the one in
Speaker 1: two thousand and eight. We spoke on Monday afternoon. Larry,
Speaker 1: without hyperbole, I think it's fair to say that there's
Speaker 1: no one alive who knows more than you do about
Speaker 1: bailout stimulus, not only in theory, but in its real
Speaker 1: world implementation. And I really want to hear your big
Speaker 1: picture and your small picture account of where we are
Speaker 1: and where we're going here. You've said that the two
Speaker 1: big uncertainties facing us are how long will this last?
Speaker 1: And how fast can the economy reopen? And I agree
Speaker 1: that those are radically uncertain questions. Now, do you have
Speaker 1: something that you want to say on either of those topics, Well,
Speaker 1: I'd start with this. This is a profoundly different economic
Speaker 1: problem than any that I have dealt with in the past,
Speaker 1: or than anyone else has dealt with in the past.
Speaker 1: All the various problems we have dealt with in the
Speaker 1: past were fundamentally about demand and fundamentally about whether the
Speaker 1: economy could produce the demand and keep everything going in
Speaker 1: a way that would enable adequate employment. This is a
Speaker 1: quite different problem. This is a problem of supply. The
Speaker 1: primary reason why the US economy is weak right now
Speaker 1: is that thirty percent of us basically can't work productively
Speaker 1: because we can't work in our workplace, we can't take
Speaker 1: our work home, and that's the main reason why output
Speaker 1: is down and unemployment is up. So any idea that
Speaker 1: this can all be solved with sufficiently ingenious fiscal policy
Speaker 1: or monetary policy is a confusion. The role of fiscal
Speaker 1: monetary policy is a palliative that maintains a measure of
Speaker 1: spending power for those who are unable to be paid,
Speaker 1: and to try to maximize the potential of the economy
Speaker 1: to recover when health conditions permit. But the fundamental constraint
Speaker 1: on the situation lies in the area of health policy,
Speaker 1: not in the area of financial policy or economic policy. Alright,
Speaker 1: you use the word palliative, so let me just get
Speaker 1: some clarity around that, because palliative sometimes sounds like we're
Speaker 1: just making you feel better until you die. I take
Speaker 1: it what you mean is that it's effectively, to use
Speaker 1: a medical metaphor, it's life support. The economy would die
Speaker 1: without the kind of bailout funds that are being passed along,
Speaker 1: But they're not a stimulus in that they're not going
Speaker 1: to stimulate further demand. The only thing that's going to
Speaker 1: change that, if I hear you correctly, is actually reopening
Speaker 1: businesses so that people can get back out as soon
Speaker 1: as it's healthy to do that, and then that would
Speaker 1: eventually restimulate the economy almost they might stimulate demand, but
Speaker 1: stimulating demand doesn't do anything if supply is constrained. I see.
Speaker 1: So the example is I badly want to go to
Speaker 1: a bar right now. I mean, I really want to
Speaker 1: go to a bar, So the demand is there. The
Speaker 1: problem is the bars are not open, so there's no
Speaker 1: supply available for me. Exactly. The story of toilet paper
Speaker 1: is actually illuminating. There's a major toilet paper shortage that
Speaker 1: many of us have encountered when we've gone to the
Speaker 1: grocery store. The original theory that was offered for that
Speaker 1: shortage was people were hoarding just in case. If that
Speaker 1: were the correct theory, at a certain point, after people
Speaker 1: had hoarded enormous supplies, they would stop buying and the
Speaker 1: problem would naturally solve itself. That we might even get
Speaker 1: a toilet paper glut in the stores because people didn't
Speaker 1: need to buy anymore given the inventories they accumulated. That
Speaker 1: is not actually what has happened. What has actually happened
Speaker 1: is it turns out that people are spending a much
Speaker 1: larger fraction of their time in their homes rather than
Speaker 1: in their offices or in restaurants or in bars. And
Speaker 1: it turns out that the nature of the toilet paper
Speaker 1: that is sold for people to use at home is
Speaker 1: different than institutional toilet paper. And so in fact we
Speaker 1: have a genuine shortage of home toilet paper, which is
Speaker 1: a higher softer quality, and we have a potential glut
Speaker 1: of institutional toilet paper. And fundamentally, our problem in the
Speaker 1: toilet paper example is that not all the demand for
Speaker 1: home toilet paper can be fulfilled. If all we do
Speaker 1: is increase purchasing power and we don't increase supply, we're
Speaker 1: not going to increase the level of output. Got it.
Speaker 1: So even if I were prepared to spend twenty bucks
Speaker 1: a roll on toilet paper, it doesn't matter because the
Speaker 1: supply is at present not there for the right kind
Speaker 1: of toilet paper. Right. Or to put it in a
Speaker 1: different way, if you gave purchasing power to people, it
Speaker 1: wouldn't do anything to raise toilet paper production because there's
Speaker 1: no demand for the kind of toilet paper that can
Speaker 1: be produced, and it would just go to bid up
Speaker 1: the price of the kind of toilet paper that is
Speaker 1: already in excess demand. So the point is that in
Speaker 1: order to increase the overall level of output in the economy,
Speaker 1: the really fundamental problem is increasing supply, and that means
Speaker 1: creating situations where people can go back to work in
Speaker 1: productive ways. So some of that would be creating situations
Speaker 1: where people were back at work, and therefore the demand
Speaker 1: for toilet paper was again filling its normal pattern. Some
Speaker 1: of it would be addressed if you could find ways
Speaker 1: of converting institutional toilet paper production capacity into the production
Speaker 1: of soft home toilet paper. But fundamentally you have to
Speaker 1: address the problem on the supply side. What are the
Speaker 1: implications of that analysis for what will happen when and
Speaker 1: if we are able to, in some gradual stepped way,
Speaker 1: start getting workers back into the productive parts of the
Speaker 1: economy where they can help restore the supply. It would
Speaker 1: seem to imply that the difficulty of getting the match
Speaker 1: up and running would be addressed, maybe much more quickly
Speaker 1: than under circumstances of a more ordinary demand crisis. Is
Speaker 1: that a fair implication? I think potentially that's right. I
Speaker 1: have used the example of what happens in Truro, Massachusetts,
Speaker 1: where I'm speaking from right now. Truro is a vacation
Speaker 1: town on the tip of Cape Cod. Every winter Truro
Speaker 1: has what, in a certain sense is a terrible depression.
Speaker 1: It's employment level, it's GDP go down by more than
Speaker 1: fifty percent, and every summer it rises up. And so
Speaker 1: I think if we're able to prevent the destruction of
Speaker 1: enterprises through bankruptcy and liquidation, I think there's the prospect
Speaker 1: that if we can get health conditions back to normal,
Speaker 1: then we can move back fairly quickly in terms of
Speaker 1: economic performance. I think it's basically misguided in light of
Speaker 1: this analysis, that we're spending trillions and trillions on broad
Speaker 1: gaged economic and financial policies and we're scrimping on health
Speaker 1: policies that have the prospect for bringing back the economy faster.
Speaker 1: The overwhelming priority should be every possible experiment in terms
Speaker 1: of developing more tests, in terms of alternative contact tracing systems,
Speaker 1: anything that can put the health crisis behind us is
Speaker 1: by far the highest payoff investment in this moment. And
Speaker 1: that's obviously, in parts a matter of dollars, but it's
Speaker 1: also a matter of proper organization. Larry, with respect to
Speaker 1: your seasonal analogy, it's one of the more hopeful things
Speaker 1: that I've heard, and I just want to ask you
Speaker 1: a question about it. A few weeks ago I interviewed
Speaker 1: for the podcast one of your colleagues in the economics
Speaker 1: department at Harvard, Stephanie Stansheva, and one of the points
Speaker 1: that she made is that as economic relationships break down
Speaker 1: as people are out of work, the transaction cost of
Speaker 1: getting people back to recreate those relationships rises, and so
Speaker 1: it becomes hard to do. Now. In your example of
Speaker 1: Truro or any vacation community which in a sense has
Speaker 1: a big decline out of season, usually long term economic
Speaker 1: relationships are retained even over the out of season period
Speaker 1: of time. Right, people have the shops that they go to,
Speaker 1: and they have the caretakers who work on their homes,
Speaker 1: and their contractors and so forth and so on. Is
Speaker 1: there a danger do you think in this particular circumstance
Speaker 1: that the re establishment of those relationships will just be
Speaker 1: much more difficult in the wake of the worksoppages that
Speaker 1: we have now than it is in a seasonal response situation.
Speaker 1: It depends on how long it takes, and it depends
Speaker 1: on the nature of the relationships in Truro, Massachusetts or
Speaker 1: a vacation town. As you move from July to September,
Speaker 1: and then you go around again until July. There are
Speaker 1: probably two kinds of things that happen. They're the chefs
Speaker 1: at the restaurants, and they're the shops that I remain
Speaker 1: loyal to. And it turns out that people have long
Speaker 1: memories and they do other things during the summer, and
Speaker 1: then they find their way back. Then there are other
Speaker 1: kinds of relationships, the waitresses in the restaurants, where there
Speaker 1: probably isn't such long memory, but where there isn't such
Speaker 1: great costs to a restaurant to having a different workforce
Speaker 1: of waitresses in twenty twenty than they had in twenty nineteen.
Speaker 1: But I think it's easy to overdo this idea that
Speaker 1: we're doomed because a relationship has been separated for some
Speaker 1: substantial interval. And I think it is very much wrong
Speaker 1: to think that people have to continue being in the workplace.
Speaker 1: It's a ubiquitous feature. For example, over decades of automobile
Speaker 1: companies that in recessions they quote laid off automobile workers
Speaker 1: who remained attached to those companies, who received significant unemployment insurance,
Speaker 1: and then when demand picked back up they were rehired.
Speaker 1: So I think we need to protect the peace people.
Speaker 1: There are more market mechanisms than people appreciate for protecting
Speaker 1: other aspects. Suppose I am a shopkeeper in a shopping
Speaker 1: center and I can't open because I'm a clothing store
Speaker 1: and I'm not deemed to be essential during the corona period,
Speaker 1: I will stop paying my rent. Now it's possible that
Speaker 1: my landlord will evict me and that my shop will
Speaker 1: be lost. On the other hand, my landlord's likely to
Speaker 1: look at the situation and say, well, if I evict him,
Speaker 1: who am I going to get to come into his
Speaker 1: place in the midst of this? And this will probably
Speaker 1: be over in a few months, and he'll be able
Speaker 1: to pay rent again if he was before, and will
Speaker 1: work some solution out with respect to the period when
Speaker 1: he couldn't earn revenue, and the relationship will be deserved.
Speaker 1: So I am more optimistic about the economy's ability to
Speaker 1: remain resilient. If the health problems can be put behind us,
Speaker 1: then some of my friends are we'll be back in
Speaker 1: just a moment. Larry, I find it very compelling to
Speaker 1: say that we would very quickly recoup any investment that
Speaker 1: we made in technology that would let us get back
Speaker 1: to work and testing is a really good example of that.
Speaker 1: The challenge that I'm struggling with in that context is
Speaker 1: sort of why we aren't doing more at that level,
Speaker 1: And as far as I can make out, the reason
Speaker 1: seems to be a perception, maybe an accurate perception, that
Speaker 1: there are a whole number of bottlenecks in enabling testing
Speaker 1: on the kind of scale of you, on the order
Speaker 1: of millions of tests a day in the United States
Speaker 1: that would be necessary to get this going. Now, that's
Speaker 1: not an argument for not trying, but it does raise
Speaker 1: the question of real world distribution bottlenecks, and I mean
Speaker 1: things like the number of swabs, the number of chemical
Speaker 1: reagents available. And there could, of course be technological innovations
Speaker 1: that would let us do these things faster and without
Speaker 1: their techniques, and of course in principle that's all possible,
Speaker 1: but it raises the question of time scale, and maybe
Speaker 1: what a lot of people are thinking is it doesn't
Speaker 1: make sense to invest heavily in this given the improbability
Speaker 1: of success. Let's be concrete for a moment, our lost
Speaker 1: GDP as a consequence of this crisis is about eighty
Speaker 1: billion dollars a week. So if we accelerate the recovery
Speaker 1: path by one week, that's worth eighty billion dollars. That
Speaker 1: dwarfs any number that anybody is remotely thinking of. In
Speaker 1: terms of testing. Economies are remarkably flexible things, and they
Speaker 1: do respond to incentives. They may not respond in three days,
Speaker 1: but they really do respond over time. This is not
Speaker 1: a time to be worried about efficient pricing of swabs,
Speaker 1: given the magnitude of the stakes. This is a reason
Speaker 1: to be trying everything. If the probability of success on
Speaker 1: something that's worth eighty billion dollars a week is only
Speaker 1: one fourth, well, that's twenty billion dollars a week. It's
Speaker 1: been estimated that tests cost fifty dollars. At fifty dollars
Speaker 1: a test, you can do a lot of tests for
Speaker 1: a very small fraction of twenty billion dollars a week.
Speaker 1: And that's assuming it's one week with the twenty five
Speaker 1: percent probability of success. Larry, I want to ask you
Speaker 1: about the question of who takes the haircut in this bailout.
Speaker 1: One of the points that you've made repeatedly is that
Speaker 1: there's real fundamental loss that's happening under these circumstances, that
Speaker 1: this isn't the kind of set of economic problems that
Speaker 1: can be solved or mitigated just by printing money or
Speaker 1: lowering interest rates. So that means there is real loss
Speaker 1: that's going to take place in the economy. The bailout
Speaker 1: process is just beginning, and inevitably corporate America will have
Speaker 1: its hand out seeking bailouts. And you've had lots of
Speaker 1: first hand experience with this. What's your view. I mean,
Speaker 1: should the airline shareholders have to take a big hit here,
Speaker 1: or should the airlines be bailed out as after nine
Speaker 1: to eleven and so on and so forth. For other industries,
Speaker 1: including maybe most prominently the oil and gas industry, I
Speaker 1: think there's almost no reason why shareholders be insulated from
Speaker 1: these losses. Shareholders are people who invested money with the
Speaker 1: expectation that, unlike people who put their money in a
Speaker 1: bank or bought US government financial instruments, they would earn
Speaker 1: a premium of four or five percent a year. And
Speaker 1: the reason they would earn that premium is that they
Speaker 1: were taking the risk that if something predictable and uncertain happened,
Speaker 1: they would lose money or that if something unpredictable and
Speaker 1: uncertain happened, they would lose money, that they were being
Speaker 1: compensated for subjecting themselves to what Donald Rumsfeld called unknown unknowns.
Speaker 1: And now an unknown unknown has happened, and they got
Speaker 1: paid for taking this risk, and it seems to me
Speaker 1: it would be very wrong to try to insulate them
Speaker 1: from that risk. All the more because the distribution of
Speaker 1: shareholder is a distribution of people who are far, far,
Speaker 1: far more affluent than most American citizens. Now, there will
Speaker 1: certainly be cases where you can't really protect workers without
Speaker 1: protecting the enterprises of which they're apart. So, just as
Speaker 1: there are unintended victims of necessary actions in wartime, there
Speaker 1: are unintended beneficiaries of necessary financial bailouts. But the objective
Speaker 1: should be to maintain economic activity for the benefit of
Speaker 1: customers and workers, not for the benefit of shareholders or
Speaker 1: lenders who have accepted substantial risk in return for over
Speaker 1: many years having been paid a premium interest rate. The
Speaker 1: airline industry, in a way is a classic instance, because
Speaker 1: there are half a dozen instances in the last twenty
Speaker 1: years when airlines have gone through bankruptcy, their debts have
Speaker 1: been written down, their share prices have been written way
Speaker 1: way down and they've continued to fly. And most of us,
Speaker 1: as we stood in line to get on board, had
Speaker 1: no idea whether an airline was bankrupt or not. So
Speaker 1: we need to stop confusing bankruptcy with the destruction of
Speaker 1: an enterprise's productive capacity. Just in support of your argument, Larry,
Speaker 1: I think it's even fair to say that pandemic doesn't
Speaker 1: count as an unknown unknown in Donald Rumsselo's formulation. It's
Speaker 1: a known unknown. You know, from the time that I
Speaker 1: was in seventh grade, a central part of our curriculum
Speaker 1: was pandemic is a thing. It has occurred historically, it
Speaker 1: can occur again. Their circumstances of globalization that can give
Speaker 1: rise to it. We've seen various potential pandemics being limited
Speaker 1: or constraint that may have led people to make a
Speaker 1: mistake in terms of the probabilities of an actual pandemics
Speaker 1: breaking out, But that such a thing could exist was
Speaker 1: certainly very clear to everybody and should have been therefore
Speaker 1: a known unknown rather than an unknown unknown. I think
Speaker 1: that's right. The idea that we could have a pandemic
Speaker 1: should have been in people's minds. Most of the leading
Speaker 1: financial authorities who were involved in the effort to establish
Speaker 1: new financial regulation said sometime in the last few years
Speaker 1: that they thought we would never have a financial crisis
Speaker 1: as serious as two thousand and eight in their lifetimes.
Speaker 1: One of the many reasons why I didn't join that
Speaker 1: view was an awareness that if we had pandemic flew
Speaker 1: of the kind we'd had nineteen eighteen, it would probably
Speaker 1: be an immense financial crisis, and that that was a
Speaker 1: significant risk. So I think you're right, Larry. Before I
Speaker 1: let you go, I just want to ask you one
Speaker 1: last sort of macroeconomic question that's puzzling me. And it's
Speaker 1: Corona adjacent, let's say, and that is the role that
Speaker 1: the United States has just played, the President Trump has
Speaker 1: just played in attempting to broker a deal with other
Speaker 1: large petroleum producing companies to shore up oil prices. Now,
Speaker 1: on the one hand, you know, there are lots of
Speaker 1: people in the United States who were working in energy
Speaker 1: related businesses or in oil related businesses, and so I
Speaker 1: suppose this could be justified on the grounds that it's
Speaker 1: an attempt to help out American workers in shore up
Speaker 1: in American industry. On the other hand, it sort of
Speaker 1: looks like the United States participating, or it is the
Speaker 1: United States participating very directly in the kind of cartelization
Speaker 1: that historically we as a country have been at least
Speaker 1: publicly skeptical about. You know, the United States was never
Speaker 1: a member of OPEC and at least actually never talk
Speaker 1: the talk of how great it is to assure that
Speaker 1: prices would be protected from real world changes, in this instance,
Speaker 1: in the demand side rather than the supply side. Can
Speaker 1: you just give me a you know. Larry Summer's reaction
Speaker 1: to this, was this something the United States should have done?
Speaker 1: And if so, why, because it can be a little
Speaker 1: hard to see from the outside. I think if I
Speaker 1: had been the policymaker, I would not have done it,
Speaker 1: essentially for the reason you describe this is a cartel.
Speaker 1: We don't usually believe in supporting cartels. And it's not
Speaker 1: like our only interest is as an exporter. We have
Speaker 1: moved in the last few years and so now we're
Speaker 1: just about self sufficient. But that means the US consumer
Speaker 1: interest is about comparable to the US producer interest, and
Speaker 1: the consumer interest, of course loses when we push prices up.
Speaker 1: Most of the other winners from higher prices are places
Speaker 1: like Russia and Saudi Arabia where it's not at all
Speaker 1: clear that our national interests are served by their becoming wealthier.
Speaker 1: So I would not have done this. That said, there
Speaker 1: is a problem, which is the tendency towards what economists
Speaker 1: call a cobweb cycle. And if you allow the price
Speaker 1: to collapse, then the profits collapse, and then the funds
Speaker 1: for investment collapse, and then down the road you have
Speaker 1: a big supply shortage and the price spikes right back up.
Speaker 1: So there is that concern. I think it would be
Speaker 1: better met by reinforcing investment during this difficult period. I
Speaker 1: also think that you're a ted idealistic on the these
Speaker 1: kinds of arrangements. I remember when I served in President
Speaker 1: Clinton's administration being the dissenting voice, but the dissenting voice
Speaker 1: who lost the argument when the United States was an
Speaker 1: enthusiastic participant in the organization of an aluminum cartel, with
Speaker 1: the rationale being to protect American aluminum producers who employed
Speaker 1: a fair number of people, and to be supportive of
Speaker 1: Russia at a time when we were trying to support
Speaker 1: President Yelson and they were a substantial aluminum exporter. So
Speaker 1: I think it would be wrong to think that this
Speaker 1: was anything like the first time the United States had
Speaker 1: been substantially supportive of a cartel in a key global
Speaker 1: commodity on grounds of price stability, although the rationale here
Speaker 1: may also be a domestic rationale goal of helping an
Speaker 1: industry with which the president and his party are seen
Speaker 1: as being pretty closely aligned. If I can say something
Speaker 1: the opposite of idealistic, as I said in the aluminum example,
Speaker 1: that was also part of the calculation. I'm with the
Speaker 1: economics profession and a lack of enthusiasm for cartels, but
Speaker 1: it'd be a mistake to overstate the strength of the
Speaker 1: American tradition in opposing them. Larry, thank you very much
Speaker 1: for your analysis and your time. There's a lot to
Speaker 1: think about there, some of it a little more hopeful
Speaker 1: and some of it a little more pessimistic than other
Speaker 1: things that I've heard, but all of it deeply insightful
Speaker 1: and informed by your distinctive combination of knowing the theory
Speaker 1: and having done the reality. So thank you very very much.
Speaker 1: Thank you. Speaking to Larry Summers, you get a strong
Speaker 1: sense of both how serious the challenges are that are
Speaker 1: facing our economy now and also a hint of greater
Speaker 1: optimism than some other sources have expressed about the probabilities
Speaker 1: of our being able to turn it around. On the
Speaker 1: one hand, Larry is crystal clear that this is not
Speaker 1: the same kind of economic crisis that we've faced before,
Speaker 1: and that therefore government money to ordinary people and to
Speaker 1: businesses is not going to take the form of a
Speaker 1: stimulus that will get things going again. To the contrary,
Speaker 1: Larry says very very clearly, it's just to keep us
Speaker 1: going for now. It's not going to turn things around.
Speaker 1: That's a serious, serious concern, and one that I think
Speaker 1: is all too often missed by people who think about
Speaker 1: this crisis in terms of past crises. On the other hand,
Speaker 1: Larry also thinks that there's an argument for seeing this
Speaker 1: current crisis as a bit like a seasonal stoppage in
Speaker 1: an industry that operates by the seasons. And if he's
Speaker 1: right about that, then our capacity to restart the economy
Speaker 1: once health and safety concerns have been alleviated may actually
Speaker 1: be substantially greater than other analysts have such tested. There's
Speaker 1: a bit of each in Larry's analysis, some sense of
Speaker 1: the gravity of the situation, some cautious optimism about the
Speaker 1: potential for the future. You can be sure that we're
Speaker 1: going to continue to stay very closely on top of
Speaker 1: the story of the economic consequences of the current pandemic
Speaker 1: and how we bounce back from it until the next
Speaker 1: time I speak to you. Be careful, be safe, and
Speaker 1: be well. Deep Background is brought to you by Pushkin Industries.
Speaker 1: Our producer is Lydia Genecott, with research help from Zooe Wynn.
Speaker 1: Mastering is by Jason Gambrel and Martin Gonzalez. Our showrunner
Speaker 1: is Sophie mcibbon. Our theme music is composed by Luis
Speaker 1: gera special thanks to the Pushkin Brass, Malcolm Gladwell, Jacob Weisberg,
Speaker 1: and Mia Lobel. I'm Noah Feldon. I also write a
Speaker 1: regular column from Bloomberg Opinion, which you can find out
Speaker 1: of Bloomberg dot Com slash Felton. To discover Bloomberg's original
Speaker 1: slate of podcasts, go to Bloomberg dot Com Podcasts. You
Speaker 1: can follow me on Twitter at Noah are Felt. This
Speaker 1: is Deep Background